~ Perspective from Vancouver

London real estate is falling down, falling down

The Evening Standard’s reporting on London’s overheated property bubble is thin on stats, long on individual cases, leading me to wonder about cherry-picking, but they do quote an estate agent who sounds near-suicidal (“There’s no end to how far prices could fall”) and cite unnamed “foreigners” who have stopped bidding on London property because they’re afraid of mounting xenophobia and racism.

They do cite one plausible sounding stat: 1 in 6 listings of the “reduced” listings on Zoopla were cut since the Brexit vote (it’s not clear whether this is unusual, though). There’s also the undeniable fact that a lot of City bankers will be leaving the country, relocated at employer expense, and their houses will go on the market.

Even without a sound statistical footing, these stories are important, because the London property market is one of the most overinflated bubbles in real-estate history, and like all bubbles, it is liable to panicked stampedes. Everyone who lauded their own financial brilliance for having bought into the market (or took out second and third mortgages to buy rental property) has also heard a nervous voice in the back of their heads, asking how long it could all last, and whether it would have a “soft landing” when it was over, or explode like Mr Creosote. If even a few speculators decide to cut their losses and list their properties now, it will increase supply, suppress prices, and cause more people to sell. …

As ever, this crash will be more of a hardship for regular people than for 1 percenters, who will take steps to cushion themselves (if you live in Vancouver, New York, LA or Seattle, get ready for an all-out assault on your housing stock!). But it will be an especially hard landing, thanks to all the special measures and conjuring tricks pulled by successive governments to keep the bubble inflating: cheap capital gains tax, no disclosure requirement for beneficial owners of properties, cash subsidies to “get on the housing ladder,” the virtual elimination of tenant protections, inheritance holidays for property bequests, and so on.

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5 thoughts on “London real estate is falling down, falling down”

Catastrophic iconography aside, I’m curious how much of this relative drop in prices is merely the ‘highest of the high’ end properties and how much is more median-range property that could affect people other than Saudi and Russian trillionaires. You’ve also got to take the panicked ramblings of a London real estate agent with a grain of salt. If my livelihood depended on the purchasing whims of billionaire foreign investors in London, I’d be a little panicky right now too. However, that doesn’t necessarily spell doom for the vast majority of owners, investors, or buyers.

Brexit has made it slightly less convenient – and less advantageous – to park foreign money in London real estate. So of course some of the curve-ruining properties above 100M-pounds are going to sour a bit. In the short term this means fewer new towers will get built. But will it have any significant impact on the majority of properties in the 800K-5M range? I don’t know, but I know enough to not bother asking this same question to a real estate agent with his own yacht.

I’ll bet a Euro that after Brexit has been fully negotiated and implemented in two or three years, there will still be a massive differential between London housing prices and those in Birmingham, York and Sheffield where voters who wanted out of the EU were most numerous.

That would still put it ~20% higher than the late 90s. But I think a drop to that level is highly unlikely given the supply and demand issues underlying all the foreign money and speculation hyperventilation. What may truly cause a huge drop is a domino-effect collapse of the economy where everyone defaults on their inordinate level of personal debt. However, if China starts defaulting on its massive sovereign debt and their economy starts to wobble like one of Thomas’s buses, you can bet the wealthy will set a fire under their efforts to get their money out and convert it to safer Canadian real estate.

One economic analyst in last Saturday’s Globe and Mail defined the foreign money issue as just another version of the supply shortage. If a home is purchased locally, that is usually accompanied by a sale of the old home. With foreigners, the purchase does not follow a sale, therefore a shortage in supply is created by the one-way transaction. Of course, “foreigner” in that case could equally apply to wealthy Canadians cashing in from outside the province to retire to Metro Vancouver.

Kerry Gold wrote a piece in the same G&M edition that incomprehensively compared NYC to Vancouver through the narrow scope of average income to housing price ratios, and concluded that NYC is somehow cheaper because incomes are higher. Someone really needs to call her on her amateurish economic analysis.

When conducting such comparisons you need to find a common denominator to allow apples to be compared to apples. In this case it could be land value which, as she pointed out, is related also to density. But there is no mystery to land values escalating with more efficient use through increased density. It’s ancient standard practice. What she ignores is the increase in efficiency. Yes, the land is worth more when you add more housing, but that value is divided in to more numerous smaller units worth less individually. The waste of land in Vancouver is far higher proportionately than NYC. Not that we need to become Manhattan, but let’s not ignore the little fact that today’s housing kerfuffle is usually about large lots containing fewer people in the context of there not being any more land available for more detached home subdivisions.

The highest prices in Vancouver are paid on luxury west side open lots with detached homes, often exceeding the standard 4,000 ft2 Vancouver lot size. So, apples to apples …. what would an open 4,000+ ft2 lot be worth on the Upper East Side of Manhattan or Central London? Answer: a helluva lot more than it’s worth here even with mainline injections of foreign money.